A recent letter ruling from the Tennessee Department of Revenue (Department) clarifies how sales and use tax applies to various services offered in employee recognition programs. The three primary areas addressed in the ruling are: consulting, startup, and website design fees; transaction fees on certificate issuance; and merchandise and gift cards.
The taxpayer’s wholly owned subsidiary provides customized employee recognition solutions which include consulting with clients’ human resources departments, designing a custom website to administer the program and training employees on website usage. The sole purpose of the website is to support the administration of the recognition programs. The taxpayer maintains full control of the website, and the client is not able to control or manipulate the website’s functionality. After applying the true object test, the Department ruled that the website is considered incidental since its sole purpose is to administer the recognition program. Additionally, the department determined that the key element of the transaction was the management of the recognition program and not the website. As the primary service here is the management of the recognition program, the fees associated with consulting, startup and website design are not subject to tax.
The recognition programs use certificates that are issued to employees as part of the recognition process. The certificates carry their value in US dollars or in points tied to US dollars. The certificates can later be redeemed for merchandise or gift cards. The taxpayer charges a transaction fee based on the value of the certificates when they are issued. The Department ruled that the fee associated with the issuance of certificates is not a taxable service since it does not qualify as a sale of tangible personal property.
The final component of the ruling examines the tax treatment of merchandise and gift cards issued when employees redeem their certificates. Merchandise is considered tangible personal property and is subject to sales tax in Tennessee. The taxpayer currently collects and remits sales tax on the retail value of the merchandise based on certificates redeemed. Gift cards are not considered tangible personal property and based on prior guidance from the Department, are not subject to tax. The taxpayer does not collect or remit sales tax on the value of gift cards issued to employees for redeemed certificates.
For companies offering similar services, mixed transactions in particular, this ruling highlights the importance of structuring transactions so that non-taxable administrative services remain distinct from taxable sales of tangible personal property. (Letter Ruling # 24-10, Tennessee Department of Revenue, November 26, 2024)